Details: General Qualified Mortgage - 43% DTI Threshold Exceeded(1000338) FAIL
The System calculated (XX.X%) debt-to-income ratio exceeds the (43.0 %) debt-to-income ratio threshold, by (XX.X%). The System used a (X.XX%) rate for this analysis. A qualified mortgage is a covered transaction for which the ratio of the consumer's total monthly debt to total monthly income at the time of consummation does not exceed 43%. (12 CFR 1026.43(e)(2)(vi))
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Appendix Q is written with the expectation that the subject property is either owner occupied or a vacation home, since Reg Z technically provides an exemption for rental properties. Based on the way Appendix Q is written, the end result is that the subject PITI on an investment property is counted as part of the “net rental” calculation AND is also counted as a debt/liability. Even though this is actually double counting the PITI, it is accurate based on how the regulation is written. This is different from the standard DTI calculation which will only do the net rental calculation, and will not count the PITI again as a separate liability. Additionally, the calculation of total income is done separately of the calculation of total debts and the end result of the two calculations are used to determine the Total Debt Ratio. Keeping that in mind, this is the Appendix Q requirement for determining “net rental income”:
In order to calculate the rental income:
i. Reduce the gross rental amount by 25 percent for vacancies and maintenance;
ii. Subtract PITI and any homeowners association dues; and
iii. Apply the resulting amount to income, if positive, or recurring debts, if negative
This calculation is outlined under the “income” section of Appendix Q, and you will notice that the PITI is included in the calculation. Separate of this, Appendix Q also requires that real estate loans and monthly housing expenses be counted as debts, and provides no means for excluding the PITI as a debt even if included in the “net rental income” calculation outlined above.
*Please note that this issue only applies to investment properties that are not occupied by the borrower at all. Multi-unit properties where the borrower lives in one unit and rents out the other unit(s) are not impacted, as Appendix Q provides specific guidance for this scenario which mirrors the standard DTI calculation.*
Article Number: 000012560
Published On: Feb 22, 2017
Updated On: Feb 23, 2017